You have been hired as a consultant by TJR, a major producer of chemicals and gl
ID: 2753405 • Letter: Y
Question
You have been hired as a consultant by TJR, a major producer of chemicals and glass, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.
Assets
Current Assets 39,000,000
Net, plant, property, and equipment 101,000,000
Total Assets 140,000,000
Liabilities and Equity
Accounts Payable 10,000,000
Accruals 10,000,000
Current Liabilities 20,000,000
Long term debt (40,000 bonds, 1000 par value) 40,000,000
Total Liabilities 60,000,000
Common Stock (10,000,000 shares) 30,000,000
Retained Earnings 50,000,000
Total Shareholders Equity 80,000,000
Total Liabilities and Shareholder’s Equity 140,000,000
The stock is currently selling for $15.56 per share, and its noncallable $1,000 par value, 20 year, 7.25 % coupon bonds with semiannual payments are selling for 1,110,000. The stock’s beta is 1.75, th yield on the 20-year Treasury bond is 4.50% and the market risk premium is 6.00%. The firms tax rate is 40%.
Which of the following is the best estimate for the market value weight of common equity for use in calculating the firm’s weighted average cost of capital (WACC)?
57.1% B) 82. 5% C) 79.6% D) 66.7% E) 77.8%
Explanation / Answer
Cost of equity (CAPM) = risk free rate + Beta * risk premium
=4.50% +1.75*6%
=15%
The weight of the equity was approx 79.6%
Market value Weight (A/C) A Shareholder equity 155600000 0.79101215 Debt Long term Debt 40000000 Non callable bond 1110000 B Total 41110000 C Total 196710000Related Questions
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